Limitation, Winding Up/Bankruptcy Petitions and Judgment Creditors

Author: Simon Hill
In: Article Published: Tuesday 22 May 2018

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Does the Limitation Act 1980 have any impact on the right of a judgment creditor to present a winding up petition/bankruptcy petition?

This was the question posed by Mummery LJ in the leading case on limitation and winding up/bankruptcy petitions, Ridgeway Motors (Isleworth) Ltd v ALTS Ltd [2005] 1 WLR 2871 (‘Ridgeway’). In that case, the issue arose in the Court of Appeal whether a judgment creditor was prevented by s.24(1) of the Limitation Act 1980 from founding a winding up petition upon a judgment debt that was more than 6 years old. In particular, whether the winding up petition was ‘an action …upon any judgment…’, since s.24(1) prohibits any such action where the judgment debt has been enforceable for more than 6 years old. 

This article will consider what, if any, limitation period[1]applies to winding up petitions and bankruptcy petitions. 

Limitation Periods

Issues surrounding the application of limitation to causes of action are not unusual in civil litigation. Such limitation periods are part of statute law; they are not contained in the common law, and the Limitation Act 1980 is the governing act. As Mummery LJ said, in paragraph 2 of Ridgeway:

‘Limitation periods are prescribed by statute, not by the common law. The 1980 Act is the current statute of limitations.’

Limitation Act 1980 and Winding Up Petitions/Bankruptcy Petitions 

The Limitation Act 1980 contains no express provisions as to winding up petitions/bankruptcy petitions. At paragraph, 2, Mummery LJ said in Ridgeway:

‘It does not contain any provisions specifically setting time limits for the commencement of winding up (or bankruptcy) proceedings by a creditor.’[2]

There is s.24(1) of Limitation Act 1980, a provision entitled ‘Time limit for actions to enforce judgments’, that could, on first blush, impose a time limit. That section reads:

‘An action shall not be brought upon any judgment after the expiration of six years from the date on which the judgment became enforceable.’

As will be apparent, any ‘an action …upon any judgment…’commenced more than 6 years from the date the judgment debt became enforceable, is time-barred by this provision. Crucial therefore to understanding the application of this provision, is the exact meaning of the phrase ‘an action …upon any judgment…’

In Ridgeway, Mummery LJ referred, at paragraph 29, to the House of Lords case of Lowsley v Forbes [1999] 1 AC 329, where it was unanimously held that the expression ‘an action…upon a judgment’ in section 24(1) ‘…has a special legal meaning derived from its legislative history.’ Thereafter Parliament itself has treated ‘an action…upon a judgment' as ‘…having the special or technical meaning of a “fresh action” brought upon a judgment in order to obtain a second judgment, which can be executed.’ In consequence, Mummery LJ said, at paragraph 29:

‘Insolvency proceedings, whether personal or corporate, do not fall within the scope of the special meaning of "an action ... upon a judgment". A winding up petition is neither (a) an action upon a judgment in the special sense of being designed to re-establish by legal proceedings the liability of the company to pay a judgment debt and obtain another judgment for it, nor (b) a process of execution of the judgment on which the petition is based. It is sui generis, being in the nature of a wider legal proceeding available for the collective enforcement of the admitted or proved debts of the company for the benefit of the general body of creditors on a pari passu basis: …Whatever its correct juristic classification may be, a winding up petition is not, according to authorities binding on this court, "an action upon a judgment" within section 24(1) and is not statute-barred.’

This approach is consistent with the policy lying behind the Limitation Act 1980, On this, Mummery LJ said, at paragraph 31, that there was ‘…much to be said for the submission of Mr Anthony Mann QC, appearing as counsel for the plaintiff judgment creditors in Lowsley v Forbes [1999]…’ (later Mr Justice Mann), where he said:

‘There are good policy reasons for distinguishing between action and execution. Limitation statutes are intended to prevent stale claims, to relieve a potential defendant of the uncertainty of a potential claim against [him] and to remove the injustice of increasing difficulties of proof as time goes by. These considerations do not apply to execution. If it is unfair to have a judgment debt outstanding with interest running at a high rate, the debtor has the remedy of paying the debt or taking out his own bankruptcy if he cannot pay it.’[3]

Adopting the tenor to the latter part of Mr Mann QC’s submission, Mummery LJ observed, at paragraph 33, that:

‘It was always open (and is still open) to [the judgment debtor] to avoid the consequences of this situation either by satisfying the judgment, if able to do so, or, if unable to do so, by taking other steps open to a company unable to pay its debts as and when they fall due for payment.’

In reaching the conclusion that ‘an action…upon a judgment…’ did not include a winding up petition/bankruptcy petition, the Court of Appeal had to discount the sense otherwise indicated by s.38(1) to the Limitation Act 1980, as to the correct meaning of ‘action’ in that phrase. Section 38 is entitled ‘Interpretation’ and reads (to the extent relevant):

‘(1) In this Act, unless the context otherwise requires—

“action” includes any proceeding in a court of law, including an ecclesiastical court’

(11) References in this Act to an action do not include any method of recovery of a sum recoverable under—

(a) Part 3 of the Social Security Administration Act 1992,

(b) section 127(c)  of the Social Security Contributions and Benefits Act 1992, or

(c) Part 1 of the Tax Credits Act 2002,

other than a proceeding in a court of law.’

At first blush, this definition of ‘action’ would seem to catch a winding up petition, since a winding up petition would appear to come within ‘any proceeding in a court of law’. However, the Court of Appeal in Ridgeway were driven from this conclusion by the context in which Parliament enacted s.24(1). That context included ‘…statements by the Law Reform Committee Report as to what the law was understood to be, on whose report Parliament based the amendment to section 2(4) of the 1939 Act’ (paragraph 32). Principally, this was that s.24(1)’s predecessor in the Limitation Act 1939, s.2(4) contained the same phrase, ‘an action…upon any judgment’[4]and that had been construed in W T Lamb & Sons v Rider [1948] 2 KB 331 (‘Lamb’‘…as applying only to suing for a judgment upon a judgment. It did not apply to execution of a judgment.’ (paragraph 10). Mummery LJ in Ridgeway summarized the conclusion reached by the Court of Appeal in Lamb, at paragraph 12:

‘…the Court of Appeal…concluded that the…limitation period set in the 1939 Act…dealt only with the "substantive right to sue for and obtain a judgment, and with that alone"; the period did not apply to the "procedural machinery for enforcing a judgment when obtained". The broad definition of "action" in the 1939 Act did not have the effect of merging what had formerly been the two "quite independent and distinct" subjects of (a) the substantive right to sue for and obtain a judgment and (b) the procedural machinery for enforcing a judgment when obtained…’[5]

When the Law Reform Committee reviewed the law, it ‘…did not question the interpretation of section 2(4) laid down in W T Lamb & Sons v Rider [1948] 2 KB 331 drawing a distinction between suing upon a judgment by a fresh action for another judgment and executing an existing judgment…’ (paragraph 18) 

Parliament then enacted s.24(1), amending it only in reducing the period from 12 years to 6 years, in light of this understanding as to what ‘an action…upon a judgment’ meant. [6]

Bankruptcy Petitions

The case of Ridgeway involved a company judgment debtor facing a winding up petition. Strictly speaking therefore, the ratio of Ridgeway relates to winding up petitions and comments about s.24(1)’s application to bankruptcy petitions are obiter. The scope of the decision in Ridgeway was made clear when Mummery LJ said, at paragraph 35:

The only ruling necessary for the disposal of this appeal is that the presentation of a winding up petition by a judgment creditor is not subject to the six-year limitation period applicable to bringing an action upon a judgment within section 24(1).’

However he went on to say ‘The same ruling applies to the presentation of a bankruptcy petition.' While this comment might be obiter, it is very likely to be upheld as a correct statement of the law, especially following some observations made in Mittal v RP Capital Explorer Master Fund [2014] BPIR 1537 (‘Mittal’) and Revenue and Customs Commissioners v Morris [2008] BPIR 391 (‘Morris’). Firstly, in Mittal, Deputy Registrar Briggs noted the ratio of Ridgeway and said, at paragraph 51:

‘Mummery LJ noted that it was not suggested in the course of the hearing (and hinted that even if it was the suggestion would not be accepted) that there is any relevant difference between a bankruptcy petition and a winding up petition in this context. The Court of Appeal held that a petition of this nature is a proceeding in a court of law and not an execution on judgment or a process of execution of the judgment.’

Secondly, parallels between winding up proceedings and bankruptcy proceedings, as insolvency proceedings, were made by HHJ Pelling QC sitting as a judge of the High Court in Morris. After referring to Ridgeway, and winding up proceedings being sui generis rather than, strictly speaking, a process of execution[7]the judge in Morris said, at paragraph 32 said:

In my judgment, there is no reason for distinguishing between bankruptcy petitions on the one hand and winding up petitions on the other, or for the orders made pursuant to each….Insolvency proceedings, there winding up, but in my judgment equally individual bankruptcy petitions, are legal proceedings and are legal proceedings for the collective enforcement of admitted or proved debts….’

Non-Judgment Creditors, Limitation and Petitions/Statutory Demands

It is important to keep in mind the distinction between, on the one hand, judgment creditors, and on the other hand, cause of action holders/ordinary (non-judgment) creditors (adopting the labeling in Ridgeway, these are called ‘ordinary creditors’). Ridgeway was concerned only with judgment debts and not causes of action/ordinary debts. In a bid to avoid any confusion arising as to the application of the decision in Ridgeway, Mummery LJ emphasized the above distinction and opted to give guidance as to how the law applies to this alternative, ordinary creditor scenario. Mummery LJ said, at paragraph 35(1):

Ordinary creditors. This case is not concerned with the position of an ordinary creditor who has not established his debt by a judgment. Section 24(1) does not apply, as there is no judgment on which to bring an action, let alone base a petition. It does not follow, however, that a person owed a debt by a company under a contract is entitled to present a petition after the expiration of six years from the accrual of his cause of action. If the debt is statute-barred at the time of the presentation of the winding up petition, the petitioner is not at that date a "creditor" of the company and has no standing under section 124 of the Insolvency Act 1986 to present a petition in that capacity…’.

In Mittal, Deputy Registrar Briggs quoted the above passage from Ridgeway, and held, at paragraph 53, that it applies ‘…equally to bankruptcy petitions.’, and to statutory demands. The Deputy Registrar in Mittal held, at paragraph 58, that ‘…demands can only be made on a debt that is enforceable in law and only by a party who is a creditor.’ The editors of Muir Hunter on Personal Insolvency, summarized the position, at 3-315, as ‘A statutory demand for a statute-barred debt must be set aside, and any petition founded on it must be dismissed.’ Deputy Registrar Briggs in Mittal gave the rationale, at paragraph 58, as ‘…otherwise statutory demands could be made for unenforceable claims of all types for no obvious purposes or made by parties who were not in law creditors. Further there would be no point in pursuing a statutory demand when a petition based on such a demand would be immediately dismissed in accordance with Court of Appeal authority.’

Judgment Creditors and Proving in a Liquidation/Bankruptcy 

Returning to judgment creditors, a judgment creditor is able to petition on a judgment debt enforceable for more than 6 years, and in the event that the judgment debtor enters liquidation/bankruptcy, the judgment creditor will be a ‘creditor’ to the judgment debtor, in the normal way, for the purposes entitlement to lodge a proof of debt and receive any dividend distribution qua member of an eligible creditor class, pari passu. In Ridgeway, Mummery LJ said, at paragraph 35(2):

‘The judgment creditor is still a "creditor" of the company and the debt owing is still one of the "liabilities" of the company, even after the expiration of six years from the date when his judgment became enforceable. The judgment creditor does not cease to be a creditor as a result of section 24(1) applying to prevent him from bringing an action on the judgment for a second judgment.’

On the other hand, and this is the basis for the distinction, an ordinary creditor ceases to be a ‘creditor’ in the relevant sense, upon the liability becoming time-barred. Mummery LJ said, at paragraph 35(2):

‘This is different from the position of the ordinary creditor whose cause of action for non-payment of a contract debt is barred after the expiration of six years from the date of the accrual of his cause of action: he is no longer a creditor of the company and is neither entitled to present a winding up petition nor to prove for the statute-barred debt in the liquidation…’

Conclusion

The Limitation Act 1980 does not impose a limitation period for winding up petitions founded upon judgment debts. A winding up petition is not ‘an action…upon any judgment’ within the meaning of this phrase in s.24(1) of the Limitation Act 1980. It is very likely that bankruptcy petitions do not fall within s.24(1) either. The absence of a limitation period is consistent with the policy behind the Limitation Act 1980, that is, to prevent stale causes of action being litigated, rather than to inhibit enforcement of judgments, including (sui generis[8]) winding up and bankruptcy petitions.  

SIMON HILL © 2018

BARRISTER

33 BEDFORD ROW 

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.


[1] This article does not consider the inherent jurisdiction of the Court to prevent an abuse of its own legal procedure. The case of Ridgeway Motors (Isleworth) Ltd v ALTS Ltd [2005] 1 WLR 2871 did not consider this aspect either. In Ridgeway, at paragraph 2, Mummery LJ said ‘The company does not invoke the inherent jurisdiction to prevent an abuse of legal procedure. It relies solely on section 24 of the 1980 Act…’

[2] As stated in footnote 1 above,Ridgeway Motors (Isleworth) Ltd v ALTS Ltd [2005] 1 WLR 2871 did not concern or consider the Court’s inherent jurisdiction to prevent abuse of its own legal process.

[3] In addition, on the jurisprudence behind the Limitation Act 1980, Mummery LJ adopted, at paragraph 30 of Ridgeway Motors (Isleworth) Ltd v ALTS Ltd[2005] 1 WLR 2871, the summary given in Halsbury's Laws of England, 4th ed Reissue, Vol 28, (1997), paragraph 805:

‘The courts have expressed at least three differing reasons supporting the existence of statutes of limitation, namely (1) that long dormant claims have more of cruelty than justice in them; (2) that a defendant might have lost the evidence to disprove a stale claim; and (3) that persons with good causes of action should pursue them with reasonable diligence.’

[4] Section 2(4) of Limitation Act 1939 (now obsolete) read: 

‘An action shall not be brought upon any judgment after the expiration of twelve years from the date on which the judgment became enforceable…’

[5] Further, in Ridgeway Motors (Isleworth) Ltd v ALTS Ltd [2005] 1 WLR 2871, Mummery LJ said, at paragraph 14 ‘…W T Lamb & Sons v Rider [1948] 2 KB 331 is authority for the proposition that the limitation period set by section 2(4) only applied to an action brought by a judgment creditor suing upon his existing judgment for another judgment. For limitation purposes an action brought upon a judgment to obtain another substantive judgment was distinct from the procedural steps taken to execute an existing judgment.’

[6] During this exercise of statutory construction, the Court was able to take account of the Law Reform committee’s recommendations. Mummery LJ in said, at paragraph 16:

‘In interpreting section 24(1) the court is not entitled to take into account the committee's recommendations acted on by Parliament in the subsequent legislation, but it is entitled to have regard to the statements contained in the report of the mischief aimed at and of the state of the law as it was then understood to be by the committee: Black-Clawson International Ltd v Papierwerke Waldhof-Aschaffenburg AG [1975] AC 591.’

[7] The question for the judge in Revenue and Customs Commissioners v Morris [2008] BPIR 391 was ‘…whether the bankruptcy petition can be said to be an enforcement proceeding within themeaning of the Regulations…’ (paragraph 31). The ‘Regulations’ being referred to were the Recovery of Duties and Taxes Etc. Due in Other Member States (Corresponding UK Claims, Procedure and Supplementary) Regulations 2004. The judge in Morris, at paragraphs 31 and 32, answered the question:

‘In my judgment, it is. It was held in Ridgeway v ALTS Limited [2005] 1 WLR 2871 that whilst a winding up petition was not a process of execution, it was, and here I quote from the judgment of Mummery LJ at page 2879 at letter H:

“… sui generis, being in the nature of a wider legal proceeding available for the collective enforcement of the admitted or proved debts of the company for the benefit of the general body of creditors on a pari passu basis: see, for example, In re Lines Bros Ltd [1983] Ch 1, 20.”

[8] Sui generis is Latin and means, of its own kind or class; in a class of its own, unique.